“There is also concern about the possibility of a breakout of inflation, although current inflation risk is not considered unmanageable, and of an unsustainable bubble in equity and fixed-income markets given current prices.”

“Uncertainty exists about how markets will reestablish normal valuations when the Fed withdraws from the market. It will likely be difficult to unwind policy accommodation, and the end of monetary easing may be painful for consumers and businesses.”

“Uncertainty about fiscal and monetary policy is deterring business investment that would spur growth.”

Simon & Garfunkel, Bridge Over Troubled Water, Central Park

When you’re weary, feeling small,
When tears are in your eyes, I will dry them all;
I’m on your side. when times get rough
And friends just cant be found,
Like a bridge over troubled water
I will lay me down.
Like a bridge over troubled water
I will lay me down.

When you’re down and out,
When you’re on the street,
When evening falls so hard
I will comfort you.
Ill take your part.
When darkness comes
And pains is all around,
Like a bridge over troubled water
I will lay me down.
Like a bridge over troubled water
I will lay me down.

Sail on silver girl,
Sail on by.
Your time has come to shine.
All your dreams are on their way.
See how they shine.
If you need a friend
Im sailing right behind.
Like a bridge over troubled water
I will ease your mind.
Like a bridge over troubled water
I will ease your mind.

Federal Advisory Council (FAC) May 17, 2013 Report

Fed’s Advisory Council Admits We’re Screwed

Jim Rogers: Fed’s ‘Artificial’ Inflation of Economy Will End Badly

Marc Faber Sees Bubble in Safest Government Bonds

Dr Marc Faber – US is in 50 100 trillion worth of debt!

Bernanke Has Losing Control Over The Economy – Bill Gross

James Grant (September 2012)

A rare interview with an influential Financial Thought Leader and financial historian. James Grant, founder and editor of Grant’s Interest Rate Observer, will discuss why the Federal Reserve’s policies of zero interest rates and massive purchases of U.S. Treasury and mortgage-backed bonds are dangerous to the economy and damaging to savers.
WealthTrack Episode 914, 09-28-12

“What is the Fed’s exit strategy?”

JEC Chairman Kevin Brady asks for Federal Reserve Chairman Ben Bernanke’s exit strategy for ending quantitative easing this summer. Chairman Brady is pushing to return the Fed to a single mandate of maintaining the sound purchasing power of the dollar

Members of the Federal Reserve’s advisory council, which includes the Board of Governors, have expressed strong concerns over the Fed’s low-interest rate policies and its bond-purchase program, which they say could trigger unmanageable inflation and an “unsustainable bubble” in the stock and bond markets.

Minutes of the Federal Advisory Council meeting held on May 17 were published Friday on the Fed’s website and reveal concerns among its officials over the long-term ramifications of its quantitative easing policies.

“There is also concern about the possibility of a breakout of inflation, although current inflation risk is not considered unmanageable, and of an unsustainable bubble in equity and fixed-income markets given current prices,” according to the minutes of the council meeting.

Members of the Federal Reserve’s advisory council, which includes the Board of Governors, have expressed strong concerns over the Fed’s low-interest rate policies and its bond-purchase program, which they say could trigger unmanageable inflation and an “unsustainable bubble” in the stock and bond markets.

Minutes of the Federal Advisory Council meeting held on May 17 were published Friday on the Fed’s website and reveal concerns among its officials over the long-term ramifications of its quantitative easing policies.

“There is also concern about the possibility of a breakout of inflation, although current inflation risk is not considered unmanageable, and of an unsustainable bubble in equity and fixed-income markets given current prices,” according to the minutes of the council meeting.

Some of the members of the advisory council, consisting of private bankers from each of the Fed’s 12 banking districts, pointed out that near-zero interest rates could not be sustained in the long run.

A spike in inflation could force the Fed to hike interest rates, hurting business confidence and consumer spending, and prove disastrous to the U.S economy, which is still clawing its way back from the debilitating effects of the 2008 financial crisis.

Although the council’s members acknowledged that the Fed’s current policies have aided a slow recovery, its effectiveness on employment generation is not clear, they noted. “Uncertainty about fiscal and monetary policy is deterring business investment that would spur growth,” the Council noted.

Unemployment in the United States dipped marginally to 7.50 percent in April 2013 from 7.60 percent in March.

The advisory council echoed the concerns of some economists that the Fed’s massive bond-buying exercise could potentially expose the banks to systemic financial risks and structural problems.

“Net interest margins are very compressed, making favorable earnings trends difficult and encouraging banks to take on more risk. The Fed’s aggressive purchases of 15-year and 30-year MBS have depressed yields for the “bread and butter” investment in most bank portfolios; banks seeking additional yield have had to turn to investment options with longer durations, lower liquidity, and/or higher credit risk,” the minutes said.

Some members also expressed anxiety over the recent surge in markets stating that the equity and fixed-income markets are bloated. On May 28, consumer confidence and higher home prices help the Dow Jones Industrial Average scale another record high to end the day up 106 points, or 0.7 percent to 15,409.

The strongly worded sentiments expressed in the minutes clearly suggest that overvalued markets could come down to more realistic levels when the Fed stops its quantitative easing program.

“Uncertainty exists about how markets will reestablish normal valuations when the Fed withdraws from the market. It will likely be difficult to unwind policy accommodation, and the end of monetary easing may be painful for consumers and businesses,” the minutes stated.

The Federal Advisory Council (FAC), which is composed of twelve representatives of the banking industry, consults with and advises the Board on all matters within the Board’s jurisdiction. The council ordinarily meets four times a year, the minimum number of meetings required by the Federal Reserve Act. These meetings are always held in Washington, D.C., customarily on the first Friday of February, May, September, and December, although occasionally the meetings are set for different times to suit the convenience of either the council or the Board. Each year, each Reserve Bank chooses one person to represent its District on the FAC, and members customarily serve three one-year terms. The members elect their own officers.

Members

Joseph L. Hooley, First District

James P. Gorman, Second District

Bharat B. Masrani, Third District

James E. Rohr, Fourth District

Kelly S. King, Fifth District

Daryl G. Byrd, Sixth District

David W. Nelms, Seventh District

D. Bryan Jordan, Eighth District

Patrick J. Donovan, Ninth District

Jonathan M. Kemper, Tenth District

Richard W. Evans, Jr., Eleventh District

J. Michael Shepherd, Twelfth District

James E. Annable, Secretary

Why The Fed Balance Sheet Matters

On March 12, the Wall Street Journal published an opinion piece by Professor Alan Blinder, currently a Princeton faculty member in economics, the former Vice Chairman of the Federal Reserve from 1994 to 1996, and rumored to be on the short list to replace Ben Bernanke in 2014. In his column, “Easing Angst about Fed Easing,” Blinder downplays widespread concern in financial circles (including this small one) that the Fed is painting itself into a corner via its ongoing efforts to stimulate the U.S. job growth quantitative easing.

With its balance sheet now having grown to $3.1 trillion, or about 20% of U.S. GDP, the Fed has vowed to keep up its $85 billion per month of bond purchases (or, $1 trillion per annum) “until the outlook for the labor market has improved substantially,” with 6.5% being the magic number mentioned by several key members of the FOMC. In the face of these staggering numbers, Blinder counsels one and all to adopt the stance of Mad Magazine’s Alfred E. Newman: “What, me worry?”

Critics of the Fed’s QE program worry that as trillions in monetary stimulus accumulate it becomes increasingly difficult for the Fed to reverse its easing policy and shrink its balance sheet from its current size back down to its pre-2008 level of about 6% the size of U.S. GDP. With the current unemployment rate at 7.6%, Morgan Stanley estimates that it will take between 5 and 6 years at a monthly job creation rate of 150,000 new jobs per month. In dollar terms, if the Morgan Stanley analysis is to be believed, the Fed balance sheet will have grown from $3 trillion to $9 trillion, about 50% of annual estimated U.S. GDP in 2019, assuming a minimally satisfactory 2.5% annual GDP growth rate over the next 6 years, though we note that the current rate of GDP growth is in the 2.0% range.

Would the Fed really hold its course on monthly bond purchases for years beyond its estimated “exit date” from QE in the middle of 2015? We doubt it: the Fed is mostly likely looking for the earliest possible time to declare victory and stop the bond purchases. Vice Chairman Yellen has indicated that two consecutive quarters of employment growth resulting in a drop in unemployment of 0.5% or more is probably enough to for the Fed to declare that the economy has reached “escape velocity” (their phrase) and thus begin to wind down QE.

Of course, a reduction in unemployment does not mean an increase in jobs. We have seen a disturbing number of able-bodied jobseekers simply give up looking for work over the past 4 years. The U.S. Labor Participation Rate (LPR) has gone from 65.6% in March 2009 to 63.3% in March 2013, meaning about 3.5 million workers have dropped out of the labor force. Real, sustainable economic growth can’t be achieved by increasing the number of permanently unemployed depending upon welfare programs.

The release presents a balance sheet for each Federal Reserve Bank, a consolidated balance sheet for all 12 Reserve Banks, an associated statement that lists the factors affecting reserve balances of depository institutions, and several other tables presenting information on the assets, liabilities, and commitments of the Federal Reserve Banks.

Open Market Operations

Open market operations (OMOs)–the purchase and sale of securities in the open market by a central bank–are a key tool used by the Federal Reserve in the implementation of monetary policy. The short-term objective for open market operations is specified by the Federal Open Market Committee (FOMC). Historically, the Federal Reserve has used OMOs to adjust the supply of reserve balances so as to keep the federal funds rate–the interest rate at which depository institutions lend reserve balances to other depository institutions overnight–around the target established by the FOMC.

The Federal Reserve’s approach to the implementation of monetary policy has evolved considerably since the financial crisis, and particularly so since late 2008 when the FOMC established a near-zero target range for the federal funds rate. Since the end of 2008, the Federal Reserve has greatly expanded its holding of longer-term securities through open market purchases with the goal of putting downward pressure on longer-term interest rates and thus supporting economic activity and job creation by making financial conditions more accommodative.

Real gross domestic product -- the output of goods and services produced by labor and property
located in the United States -- increased at an annual rate of 0.1 percent in the fourth quarter of 2012
(that is, from the third quarter to the fourth quarter), according to the "second" estimate released by the
Bureau of Economic Analysis. In the third quarter, real GDP increased 3.1 percent.
The GDP estimate released today is based on more complete source data than were available for
the "advance" estimate issued last month. In the advance estimate, real GDP declined 0.1 percent. The
upward revision to the percent change in real GDP is smaller than the average revision from the advance
to second estimate of 0.5 percentage point. While today’s release has revised the direction of change in
real GDP, the general picture of the economy for the fourth quarter remains largely the same as what
was presented last month (for more information, see "Revisions" on page 3).
The increase in real GDP in the fourth quarter primarily reflected positive contributions from
personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed
investment that were partly offset by negative contributions from private inventory investment, federal
government spending, exports, and state and local government spending. Imports, which are a
subtraction in the calculation of GDP, decreased.
The deceleration in real GDP in the fourth quarter primarily reflected downturns in private
inventory investment, in federal government spending, in exports, and in state and local government
spending that were partly offset by an upturn in nonresidential fixed investment, a larger decrease in
imports, and an acceleration in PCE.
_______
FOOTNOTE. Quarterly estimates are expressed at seasonally adjusted annual rates, unless otherwise
specified. Quarter-to-quarter dollar changes are differences between these published estimates. Percent
changes are calculated from unrounded data and are annualized. "Real" estimates are in chained (2005)
dollars. Price indexes are chain-type measures.
This news release is available on BEA’s Web site along with the Technical Note and Highlights
related to this release. For information on revisions, see "Revisions to GDP, GDI, and Their Major
Components".
_______
Final sales of computers added 0.10 percentage point to the fourth-quarter change in real GDP
after adding 0.11 percentage point to the third-quarter change. Motor vehicle output added 0.19
percentage point to the fourth-quarter change in real GDP after subtracting 0.25 percentage point from
the third-quarter change.
The price index for gross domestic purchases, which measures prices paid by U.S. residents,
increased 1.5 percent in the fourth quarter, 0.2 percentage point more than in the advance estimate; this
index increased 1.4 percent in the third quarter. Excluding food and energy prices, the price index for
gross domestic purchases increased 1.1 percent in the fourth quarter, compared with an increase of 1.2
percent in the third.
Real personal consumption expenditures increased 2.1 percent in the fourth quarter, compared
with an increase of 1.6 percent in the third. Durable goods increased 13.8 percent, compared with an
increase of 8.9 percent. Nondurable goods increased 0.1 percent, compared with an increase of 1.2
percent. Services increased 0.9 percent, compared with an increase of 0.6 percent.
Real nonresidential fixed investment increased 9.7 percent in the fourth quarter, in contrast to a
decrease of 1.8 percent in the third. Nonresidential structures increased 5.8 percent; it was unchanged in
the third quarter. Equipment and software increased 11.3 percent in the fourth quarter, in contrast to a
decrease of 2.6 percent in the third. Real residential fixed investment increased 17.5 percent, compared
with an increase of 13.5 percent.
Real exports of goods and services decreased 3.9 percent in the fourth quarter, in contrast to an
increase of 1.9 percent in the third. Real imports of goods and services decreased 4.5 percent, compared
with a decrease of 0.6 percent.
Real federal government consumption expenditures and gross investment decreased 14.8 percent
in the fourth quarter, in contrast to an increase of 9.5 percent in the third. National defense decreased
22.0 percent, in contrast to an increase of 12.9 percent. Nondefense increased 1.8 percent, compared
with an increase of 3.0 percent. Real state and local government consumption expenditures and gross
investment decreased 1.3 percent, in contrast to an increase of 0.3 percent.
The change in real private inventories subtracted 1.55 percentage points from the fourth-quarter
change in real GDP, after adding 0.73 percentage point to the third-quarter change. Private businesses
increased inventories $12.0 billion in the fourth quarter, following increases of $60.3 billion in the third
and $41.4 billion in the second.
Real final sales of domestic product -- GDP less change in private inventories -- increased 1.7
percent in the fourth quarter, compared with an increase of 2.4 percent in the third.
Gross domestic purchases
Real gross domestic purchases -- purchases by U.S. residents of goods and services wherever
produced -- decreased 0.1 percent in the fourth quarter, in contrast to an increase of 2.6 percent in the
third.
Current-dollar GDP
Current-dollar GDP -- the market value of the nation's output of goods and services -- increased
1.0 percent, or $40.2 billion, in the fourth quarter to a level of $15,851.2 billion. In the third quarter,
current-dollar GDP increased 5.9 percent, or $225.4 billion.
Revisions
The "second" estimate of the fourth-quarter percent change in GDP is 0.2 percentage point, or
$9.2 billion, more than the advance estimate issued last month, primarily reflecting an upward revision
to exports, a downward revision to imports, and an upward revision to nonresidential fixed investment
that were partly offset by a downward revision to private inventory investment.
Advance Estimate Second Estimate
(Percent change from preceding quarter)
Real GDP....................................... -0.1 0.1
Current-dollar GDP............................. 0.5 1.0
Gross domestic purchases price index........... 1.3 1.5
2012 GDP
Real GDP increased 2.2 percent in 2012 (that is, from the 2011 annual level to the 2012 annual
level), compared with an increase of 1.8 percent in 2011.
The increase in real GDP in 2012 primarily reflected positive contributions from personal
consumption expenditures (PCE), nonresidential fixed investment, exports, residential fixed investment,
and private inventory investment that were partly offset by negative contributions from federal
government spending and from state and local government spending. Imports, which are a subtraction in
the calculation of GDP, increased.
The acceleration in real GDP in 2012 primarily reflected a deceleration in imports, upturns in
residential fixed investment and in private inventory investment and smaller decreases in state and local
government spending and in federal government spending that were partly offset by decelerations in
PCE, exports, and nonresidential fixed investment.
The price index for gross domestic purchases increased 1.7 percent in 2012, compared with an
increase of 2.5 percent in 2011.
Current-dollar GDP increased 4.0 percent, or $605.8 billion, in 2012 to a level of $15,681.5
billion, compared with an increase of 4.0 percent, or $576.8 billion, in 2011.
During 2012 (that is, measured from the fourth quarter of 2011 to the fourth quarter of 2012),
real GDP increased 1.6 percent. Real GDP increased 2.0 percent during 2011. The price index for gross
domestic purchases increased 1.5 percent during 2012, compared with an increase of 2.5 percent during
2011.
* * *
BEA's national, international, regional, and industry estimates; the Survey of Current Business;
and BEA news releases are available without charge on BEA's Web site at www.bea.gov. By visiting
the site, you can also subscribe to receive free e-mail summaries of BEA releases and announcements.
* * *
Next release -- March 28, 2013 at 8:30 A.M. EDT for:
Gross Domestic Product: Fourth Quarter and Annual 2012 (Third Estimate)
Corporate Profits: Fourth Quarter and Annual 2012